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Taking a Financial Position in Your Opponent in Litigation

29 Pages Posted: 17 Feb 2016 Last revised: 21 Sep 2017

Albert H. Choi

University of Virginia School of Law

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Date Written: September 19, 2017

Abstract

Before filing suit, a plaintiff can take a financial position in the defendant firm. A short position benefits the plaintiff by transforming a negative expected-value claim into a positive expected-value one and by enhancing the claim’s settlement value. If the capital market is less than strong-form efficient, the plaintiff also benefits directly from the decline in the defendant’s stock price. When the defendant is privately informed about the case’s merits, bargaining failures can arise. While aggressive short-selling benefits the plaintiff at the expense of the defendant, moderate levels of short-selling can benefit the defendant and raise the settlement rate.

Suggested Citation

Choi, Albert H. and Spier, Kathryn E., Taking a Financial Position in Your Opponent in Litigation (September 19, 2017). Virginia Law and Economics Research Paper No. 3. Available at SSRN: https://ssrn.com/abstract=2733710 or http://dx.doi.org/10.2139/ssrn.2733710

Albert Choi (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Kathryn Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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